Central banks urged to keep markets stable

Global central banks faced calls for emergency liquidity injections after
today’s Greek general election, amid fears that a government led by New
Democracy will not be enough to reassure financial markets.

Greek politicians insisted New Democracy could quickly form a pro-bailout coalition.

Economists and traders joined politicians in demanding that banks, including the US Federal Reserve and Bank of England, step in and stabilise stock and bond markets.

According to reports today, analysts at Morgan Stanley were expecting a statement from central banks in Britain, Canada, Japan, China and India declaring a readiness to act on the eurozone crisis. The IMF announced that it was "ready to engage" with Greece.

Greek politicians insisted New Democracy could quickly form a pro-bailout coalition. After 96pc of the votes were counted tonight the mainstream conservative party had won 29.7pc of the vote, clinching victory from the leftist Syriza party with 27pc.

Antonis Samaras, leader of New Democracy, has started coalition talks with Pasok, which secured 12.4pc, and spoken to German Chancellor Angela Merkel, who said she was confident that the country would now abide by the terms of its bailout agreement.

But traders were braced for a repeat of the turbulence following the inconclusive elections in May when the stockmarket in Athens plunged almost 7pc in a day and the FTSE 100 fell nearly 2pc.

“There’s no such thing as a ‘market-friendly’ Greek election result,” said Nicholas Spiro, of Sovereign Strategy, arguing that New Democracy’s “mandate for reform will be weak”.

He added: “Investors view political developments in Athens through the prism of contagion to Spain and Italy.

“The slender victory of New Democracy should reassure the markets that Greece is not about to leave the eurozone any time soon. However, any relief rally is likely to be short-lived since there’s not much to be relieved about.

“In Greece, days and possibly weeks of political horse-trading lie ahead, while in Spain a full-fledged bail-out of the sovereign is looking increasingly likely.”

Even with a new government, Greece is expected to request an extension of its fiscal targets set by March’s €130bn (£105bn) bailout agreement. Meanwhile, capital outflows from Greece’s stricken banks have reached more than €800m each day, with €10bn having been pulled out of Greek banks since the last election.

European finance ministers held crisis talks by telephone tonight and were expected to discuss further action from the European Central Bank.

On Friday, Mario Draghi, president of the ECB, said he stood ready to provide liquidity to eurozone banks.

“This is what we have done throughout the crisis... and this is what we will continue to do,” he said.

A leaked draft of a proposed European summit document revealed plans to issue short-term bonds backed by the whole eurozone.

The debt instruments, which for short-term funding issuance are limited to a fixed percentage of economic output, fall short of the powerful “eurobonds” that have been demanded of Brussels but could be a vital step forward.

This weekend it emerged that François Hollande, the French president whose socialists won control of the parliament today, has sent European leaders a proposal for a €120bn “growth pact”.The pact proposes generating liquidity from project bonds and the European Investment Bank as well as imposing a financial transactions tax.